With Scott Brave and David Kelley.
February 2019.
Abstract: Motivated by a multi-sector general equilibrium model with input-output linkages, we use a mixed-frequency structural dynamic factor model to decompose U.S. macroeconomic fluctuations into the contributions of four "wedges" commonly used in business cycle accounting: (i) an efficiency, (ii) a labor, (iii) an investment, and (iv) a government wedge. We then evaluate the extent to which shocks to these wedges identified from long-run restrictions can explain the degree of cross-sectional co-movement in a panel of 500 real economic activity indicators at business cycle frequencies. Here, we find evidence that the labor wedge is the most likely source of this qualitative feature of business cycles for the U.S., and that it played a dominant role in contributing to the depth of the Great Recession and the prolonged weakness of the recovery from it.